In Laundering Case, a Lax Banking Law Obscured Money Flow

The New York Times on August 8, 2012 released the following:

“By JESSICA SILVER-GREENBERG and EDWARD WYATT

The list of global banks that have been accused in recent years of laundering foreign transactions totaling billions of dollars has been growing — Credit Suisse, Lloyds, Barclays, ING, HSBC — and now Standard Chartered.

The details in each case are different, with the international banks suspected of using their American subsidiaries to process tainted money for clients that included Iran, Cuba, North Korea, sponsors of terrorist groups and drug cartels.

What the cases have in common is that the accused banks took advantage of a law that was not changed until 2008 and that allowed banks to disguise client identities and move their money offshore. The cases, including one filed this week by New York’s banking regulator against Standard Chartered, also cast a harsh light on just how much activity with Iran was permitted in the years leading up to 2008 and whether the practices had violated the spirit, if not the letter, of the law.

Foreign banks until 2008 were allowed to transfer money for Iranian clients through their American subsidiaries to a separate offshore institution. In the so-called U-turn transactions, the banks had to provide scant information about the client to their American units as long as they had thoroughly vetted the transactions for suspicious activity. Suspecting that Iranian banks were financing nuclear weapons and missile programs, the loophole was finally closed in 2008.

The new money-laundering claims made by the New York Department of Financial Services against Standard Chartered are particularly embarrassing for the Treasury Department, because they show how, until 2008, foreign banks could collaborate with their Iranian clients to circumvent United States sanctions, said Jimmy Gurulé, a former Treasury Department official who is a law professor at the University of Notre Dame.

Standard Chartered, as part of a strategy to ignore regulations imposed by a division of the Treasury Department, schemed with its Iranian clients to omit crucial details from money-transfer paperwork, according to a regulatory order filed Monday. An e-mail from a lawyer to bank executives in 2001 said that payment instructions for Iranian clients “should not identify the client or the purpose of the payment,” according to the order.

The strategy of masking client details was driven, in part, by a desire for speed, according to law enforcement officials involved in the money-laundering cases. Transactions with certain risky clients, like the Iranians, were subject to much more rigorous vetting. To avoid the holdup, the officials said, some foreign banks willfully removed the names.

Since January 2009, the Justice Department, Treasury and other government entities have brought charges against five foreign banks — the British banks Lloyds and Barclays; the Dutch banks Credit Suisse and ABN Amro, now the Royal Bank of Scotland; and ING Bank of Amsterdam. The British bank HSBC is also under investigation by United States authorities for suspected money-laundering violations connected to Iran, Mexico, Saudi Arabia, Cuba and North Korea, and the bank has set aside $700 million to cover potential fines.

The settlements with the five banks generally included deferred prosecution agreements along with a substantial forfeiture of assets comparable in size to the basket of illegal transactions the banks engaged in. The five cases, which resulted from bank actions from 1995 through 2007, produced forfeitures of $2.3 billion over the last three and a half years. About half of that money went to Treasury and half to other entities, including the Manhattan district attorney’s office, which joined the Justice Department in most of the settlements.

So far, the Standard Chartered case is playing out entirely differently. To start with, action against the bank on Monday was brought by a single regulator, Benjamin M. Lawsky, a former prosecutor who now leads the New York Department of Financial Services. That is virtually unprecedented, since the vast majority of money-laundering charges come from regulators acting in concert.

The federal agencies are still investigating Standard Chartered and are debating just how expansive the suspected wrongdoing was. Mr. Lawsky claims the bank processed $250 billion in tainted money while cloaking the identities of its Iranian clients by stripping their names from paperwork. Some federal authorities, though, believe that the amount is closer to the $14 million that Standard Chartered acknowledges did not comply with regulations.

It is unclear whether the bank will settle with regulators or continue to fight. Standard Chartered must appear next week before Mr. Lawsky to explain the apparent violations and why it should not have its New York license revoked.

The divergent views on the bank’s culpability stem, in part, from the murkiness of the law governing how foreign institutions processed transactions with Iran.

Until 2008, American economic sanctions had a large exception for Iran because the Middle Eastern nation had such a vast oil business with the United States. The loophole permitted the U-turn transactions, allowing foreign institutions to route money to a bank in the United States, which would then transfer the money immediately to a different foreign institution.

Since Monday, Standard Chartered has fiercely argued that its transactions on behalf of Iranian banks and corporations fell squarely within that loophole. But Mr. Lawsky is largely basing his case on claims that the bank violated the law by covering up the identity of its Iranian clients and thwarting American efforts to detect money laundering.

In the settlements with the five banks since 2009, federal authorities and the Manhattan prosecutor accused the banks of “stripping” identifying information from some of the transactions that would have shown they were subject to sanctions and should not be allowed.

For example, in Lloyds’s $217 million settlement in 2009, senior bank managers warned colleagues in 2002 against “stripping” information from transactions referencing Iran, according to court records. In response, the records say, Lloyds simply began to “instruct Iranian banks on how to ‘clean’ payment instructions in which they were the originating bank to avoid detection” by Treasury Department filters.

The stripping constituted criminal conduct, the Justice Department said, when the transfers from sanctioned countries terminated in the United States — rather than taking a U-turn and heading back offshore. By ending in America, the transactions were subjected to stricter security standards, law enforcement officials said. In a letter sent Wednesday from Adam J. Szubin, director of Treasury’s Office of Foreign Assets Control, to Britain’s Treasury office, the department explained its enforcement efforts both before and after the 2008 changes. Now, all cross-border transfers require “the inclusion of complete originator and beneficiary information,” according to the letter, which was obtained by The New York Times.

United States banks were involved in the pre-2008 transactions only as an intermediary, and American banks have generally not been charged with violations similar to those brought against the five foreign banks. Because American banks were prohibited from being the beginning or ending party in transactions involving Iran and other sanctioned countries, they would not have been involved in the conduct that got the foreign banks into trouble.

Since the tighter sanctions went into effect, there have been no charges brought on post-2008 conduct, although Treasury’s letter says that investigations are ongoing.

Gina Talamona, a Justice Department spokeswoman, said that the lack of recent illegal conduct is because the settlements with foreign banks “required the banks to implement rigorous compliance programs and other safeguards” against further violations of sanctions. She said that the department’s enforcement program “has had a significant impact on banking industry practices involving sanctions.””

Douglas McNabb and other members of the U.S. law firm practice and write and/or report extensively on matters involving Federal Criminal Defense, INTERPOL Red Notice Removal, International Extradition Defense, OFAC SDN Sanctions Removal, International Criminal Court Defense, and US Seizure of Non-Resident, Foreign-Owned Assets. Because we have experience dealing with INTERPOL, our firm understands the inter-relationship that INTERPOL’s “Red Notice” brings to this equation.

The author of this blog is Douglas C. McNabb. Please feel free to contact him directly at mcnabb@mcnabbassociates.com or at one of the offices listed above.